Module 7- Accounting Elements & BS

Assets

Cash, properties or things of value owned by a business entity.

Result of a past transaction.

Currently owned or controlled by the business.

Will provide future inflows of economic benefit.

Current Asset

Cash or an asset that is expected to be turned into cash within 12 months or less.

Cash or cash equivalents.

Short-term investments.

Accounts receivable.

Inventory.

Non-Current Asset

An asset that is not intended to be turned into cash within 12 months, but can possibly happen.

Long-term investments.

Property, plant, or equipment.

Intangible assets.

Liabilities

Current economic obligation of the business.

Result of a past transaction.

Amounts owed to creditors.

Results in future outflows of economic benefit.

Current Liabilities Definition

Are expected to be settled in the entity's normal operating cycle (1 year).

Are held for the purpose of being traded.

Are due to be settled <1 year after balance sheet date.

Current Liabilities Examples

Accounts payable. Income taxes owed within the next year. Current portion of long term debt.

Non-Current Liabilities Definition

Are not expected to be met within the next accounting period or within 12 months of balance sheet date. (i.e., take longer than 1 accounting period to re-pay).

Non-Current Liabilities Examples

Long-term loans. Bonds payable. Long-term lease obligations. Pension benefit obligations.

What is Equity?

The residual interest once all liabilities have been subtracted from assets (OE=A-L). Represents the contributions made by the owners of the business and the sum of accumulated profits- includes capital, retained earnings, profits/loss and drawings.

Share Capital

Represents the total amount invested in the entity by the owners.

Retained Earnings/Profit (RE)

Represents the cumulative net profit of the entity that has been retained for use in the business and not paid out to the owners.

Statement of Financial Position

Also known as Balance Sheet.

Statement of Financial Position identifies what the business owns and owes at the end of the period so when written it uses 'As at......'

Income (Revenue)

Money (inflows) gained in exchange for goods or services. I.e., income.

Increases economic benefits that either increases assets or decreases liabilities.

Increases owners equity.

Is not a contribution by the owner.

Income (Revenue) Examples

Sales revenue. Rental income received on property leased by the entity.

Expenses

On-going costs incurred by the running of the business.

Decreases economic benefits which either decreases assets or increases liabilities.

Decreases owners equity.

Not drawings taken by the owner.

Expenses Examples

Cost of goods sold (COGS) during the ordinary course of business.

Wages and salaries, repairs, rent and rates, heating and lighting, telephone, insurance.

Statement of Financial Performance

Also known as Statement of Profit and Loss, or Income Statement.

A statement that reports on the revenues and expenses of a business for a specific time period, and the resulting net profit or loss. When written is uses 'for the period ended..'

What are Drawings?

Withdrawal of goods or cash from the business, by the owner, for the owner's personal use (sole trader & partnership).

(Decreases retained earnings)

What are Dividends?

Distributions of earnings to the owners/shareholders (Company/Corporation).

(Decreases retained earnings)

Accounting equation, for assets and equity?

Assets = Liabilities + Equity

Assets - Liabilities = Equity (net assets)

The terminology and equity classification will vary depending on the entity's business structure.

For sole traders/partnerships, explain which chart of accounts affects the capital account (equity)?

1. Profit/loss

2. Drawings

The terminology and equity classification will vary depending on the entity's business structure.

For companies, explain which chart of accounts constitutes equity?

1. Share Capital: (owners' contribution/investments)

2. Retained Earnings: (cumulative profits that are not distributed, after subtracting any dividends)

3. Other Reserve Accounts: ( e.g. in NZ, Foreign Currency Translation Reserve)

Most assets and liabilities meet the criteria to be recognised on a balance sheet; however, can you name examples that cannot be recognised?

1. Loyal and creative workforce (employees)

2. Expertise and skills of employees

3. Loyal customers

4. Brand image

Recognition considerations?

1. Certainty of existence

2. Certainty of measurement

3. Probability of inflow or outflow of economic resources